Acquisition profitability and timely loss recognition

Jere R. Francis and Xiumin Martin

Journal of Accounting and Economics, 2010, vol. 49, issue 1-2, 161-178

Abstract: We investigate if timely loss recognition is associated with acquisition-investment decisions. Using a Basu (1997) piece-wise linear regression model, we find that firms with more timely incorporation of economic losses into earnings make more profitable acquisitions, measured by the bidder's announcement returns and by changes in post-acquisition operating performance. These firms are also less likely to make post-acquisition divestitures (consistent with better ex ante investment decisions), but act more quickly to divest. We also find that the positive association between timely loss recognition and acquisition profitability is more pronounced for firms with higher ex ante agency costs.

Keywords: Timely; loss; recognition; Agency; costs; Accounting; conservatism; Corporate; governance; Acquisitions; Divestitures (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (93)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:49:y:2010:i:1-2:p:161-178

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